Question

Using appropriate concepts and theories from Block 2, Session 2, identify and discuss three main threats and three main opportunities that should be considered by Yum! in expanding its global reach within emerging markets such as China. (25 marks)

um! The Fast Food Giant Eating up the World

Yum! Brands is an American fast food company, headquartered in Louisville, Kentucky. It is one of the world’s largest fast food restaurant companies, and owns some big name restaurant chains such as Kentucky Fried Chicken (KFC), Pizza Hut and the Mexican food outlet Taco Bell. Yum! has pursued an extensive expansion strategy into emerging markets, most notably India, Russia and China.

With 37,000 restaurants in 110 countries, Yum! even eclipses that more famous icon of American colonisation, McDonald’s, to rank as the world’s largest restaurant chain in terms of numbers of outlets. For Yum! the task is to forge onward in this virgin territory, but also to shore up its gains against the hungry McDonald’s and other fast-food giants, all the while trying to keep the home fires burning back in the US, where sales are challenging because consumers are watching their wallets and their waistlines. The 23 years since Yum! opened its first KFC in China near Beijing’s Tiananmen Square provide a masterclass in overseas expansion. Its success to date has tempted a hundred imitations and whose progress in the future will be one of the most closely watched stories in corporate America.

“Yum!’s is an amazing story about how they conquered China so much earlier than their main rivals,” says RJ Hottovy, an analyst at Morningstar. “Part of the reason is that they built up their supply chain and their distribution system quickly, and that is giving them a real competitive advantage. When you are setting up restaurants in new territories it is often difficult to procure packaging and to develop good relationships with suppliers, but Yum! now has a nice little edge.”

China has become so important to Yum! that it now splits its sales there into a separate division ranking equal to its US market. Last year, 33 per cent of its operating profits came from China, nudging the 38 per cent from the US, and it sees much greater potential still. Adding in Pizza Hut, which is pitched as a mid-market family dining experience in China, there will be 475 new Yum! outlets in there this year, on top of the record 509 added last year.

There are almost three times as many KFCs now in mainland China than there are McDonald’s restaurants, which opened its doors there just three years later, in 1990. Mr Hottovy says competition is hotting up, however. “At the time that Yum! was accelerating in China, McDonald’s was working on a turnaround in the US, but since that has been completed, it has turned its attention to international expansion in a big way and is planning to double its presence in China, so the competition for Yum is going to be increasing,” he said.

“McDonald's, with its well-known brand, its advertising and its scale, will be a major player. But there is room for both. This is all about the rise of the middle-income consumer in China that is fuelling the growth, the story that we hear so much about.”

All of the Yum! brands are storied American companies. KFC was founded by Harland Sanders in 1952, when he was already an established Kentucky businessman and had earned the title “Kentucky Colonel” for his services to the state. Pizza Hut traces its history back almost as far, and the younger Taco Bell, whose growth has mirrored the growth of the Mexican community and the popularity of its cuisine, was founded in 1962. The three chains were pulled together by Pepsi, the drinks-maker, which ran a restaurant division until 1997, when it decided to spin off the lot.

The growth trajectory in China has not been without its setbacks, including a dip in sales at existing restaurants there in 2005, but David Novak, the former Pepsi executive who has been Yum! Chief Executive since 2000, boasts that the company’s infrastructure in China will not only carry it through but allow it to best its rivals. “China is predicted to be the fastest-growing major economy in the world,” he said in the company’s latest annual report. “In fact, it is expected to grow its middle class from around 300 million today to 500 million people in 2020. Like I’ve said in the past, we will no doubt have some bumpy years, but I wouldn’t trade our long-term position in China with any consumer company in the world.”

It is worth remembering that what Yum! is doing has never been done before. Who really knows what the Chinese appetite for Western-style fast food really will turn out to be? Both KFC and Pizza Hut have adapted their menus to local tastes, and their advertising, too. But, continuing with its second-quarter results last night, the focus is shifting to other expansion opportunities in China and beyond. The company is trialling a new Chinese food chain, called East Dawning, so that it can use its formidable distribution infrastructure for a more diverse range of brands and cuisines – just in case.

And then there are the other emerging markets. Yum! has more than 70 KFCs in India, as well as 160 Pizza Huts, and it just opened its first Taco Bell in the country in March. It promises to hit 1000 outlets in total by 2015, employing 50,000 people and raking in $100m in operating profit. Meanwhile, Mr Novak is hoping to engineer a dramatic expansion of Taco Bell, too. “Two global brands - and one on the way,” he is fond of saying. Taco Bell, with its menu of Mexican staples, from burritos and nachos to tacos, brought in just 3 per cent of its sales from outside the US in 2008, but that low figure was not for want of trying. The chain has attempted launches across the world on several occasions since the Eighties, but never gained popular acceptance. It is only now sticking a toe back into the European market, with a return to the UK via a first outlet in the Lakeside shopping centre, which opened two weeks ago.

In the US, the focus is on sprucing up the menus across the Yum! outlets, and that means making them healthier. At KFC, less chicken is being fried (hence a preference for using the initials) and more is being grilled. At Pizza Hut, putting chicken wings on a wider menu has helped reverse a slide in revenues, while Taco Bell is pushing salads. More important perhaps to the company’s financial health is a move to switch the US business from being owned and operated directly by Yum! from its headquarters at 1,900 Colonel Sanders Lane in Louisville, Kentucky, to being run by franchisees. The revenue from licence fees is lower, but at least it is stable and the margins are higher.

Results last night showed Yum! boosted operating profit by 10 per cent in the US, despite flat revenues. As ever, China eclipsed that, increasing by 33 per cent. In the quarter, the company opened 59 restaurants in China and a further 175 in 50 other countries. In short, the stagnation of its US business does not mean that an American corporation is doomed to stagnate itself, if it can seize opportunities around the world.

Foley, S. (2010) ‘The Fast Food Giant Eating up the World’, Independent, 14 July, p. 36.

Answer 1

As one of the leading firms in its industry, Yum! Brands, Inc. has numerous strengths that help it to thrive in the market place. These strengths not only help it to protect the market share in existing markets but also help in penetrating new markets

Some of the strengths of Yum! Brands, Inc. are:-

• Reliable suppliers - It has a strong base of reliable supplier of raw material thus enabling the company to overcome any supply chain bottlenecks.
• High level of customer satisfaction - the company with its dedicated customer relationship management department has able to achieve a high level of customer satisfaction among present customers and good brand equity among the potential customers.
• Highly successful at Go To Market strategies for its products.
• Strong Brand Portfolio - Over the years Yum! Brands, Inc. has invested in building a strong brand portfolio. The SWOT analysis of Yum! Brands, Inc. just underlines this fact. This brand portfolio can be extremely useful if the organization wants to expand into new product categories.
• Strong distribution network - Over the years Yum! Brands, Inc. has built a reliable distribution network that can reach majority of its potential market.
• Strong Free Cash Flow - Yum! Brands, Inc. has strong free cash flows that provide resources in the hand of the company to expand into new projects.
• Highly skilled workforce through successful training and learning programs. Yum! Brands, Inc. is investing huge resources in training and development of its employees resulting in a workforce that is not only highly skilled but also motivated to achieve more.
• Superb Performance in New Markets - Yum! Brands, Inc. has built expertise at entering new markets and making success of them. The expansion has helped the organization to build new revenue stream and diversify the economic cycle risk in the markets it operates in.

Weakness are the areas where Yum! Brands, Inc. can improve upon. Strategy is about making choices and weakness are the areas where a company can improve using SWOT analysis and build on its competitive advantage and strategic positioning.

• Need more investment in new technologies. Given the scale of expansion and different geographies the company is planning to expand into, Yum! Brands, Inc. needs to put more money in technology to integrate the processes across the board. Right now the investment in technologies is not at par with the vision of the company.
• Financial planning is not done properly and efficiently. The current asset ratio and liquid asset ratios suggest that the company can use the cash more efficiently than what it is doing at present.
• The marketing of the products left a lot to be desired. Even though the product is a success in terms of sale but its positioning and unique selling proposition is not clearly defined which can lead to the attacks in this segment from the competitors.
• Limited success outside core business - Even though Yum! Brands, Inc. is one of the leading organizations in its industry it has faced challenges in moving to other product segments with its present culture.
• Not highly successful at integrating firms with different work culture. As mentioned earlier even though Yum! Brands, Inc. is successful at integrating small companies it has its share of failure to merge firms that have different work culture.
• Organization structure is only compatible with present business model thus limiting expansion in adjacent product segments.
• Days inventory is high compare to the competitors - making the company raise more capital to invest in the channel. This can impact the long term growth of Yum! Brands, Inc.

Opportunities in the analysis of Yum Brands

R & D - A major opportunity for Yum brands is to leverage the existing finance with them to start more daring franchise’s in the market. For this, they need to carry out R & D to come out with regularly new dishes and to make customer’s mouth water. After all, that is the secret to really conquer the market.

Localization - One of the brands amongst all brands of Yum which localises very well is KFC. KFC started many different types of burgers and food items just to serve to local market in the areas where it was operating. However, the same cannot be said for Taco Bell and Pizza Hut which have limited localisation options. However, better localization will increase the overall revenue of the brand itself.

Emerging markets - Expansion is the key to the continuous growth of a brand like Yum brands and it has to keep expanding in new avenues to keep growing. One of the best options to keep expanding is to invest in stores in emerging markets. Emerging markets have a better spending power and people there are ready to try something new. As a result, new franchise’s are in high demand in emerging markets. These should always be the target markets for yum brands.

Better operations - A major factor which can boost the revenue and profits of a firm the size of Yum brands is better operations. Yum should find tune their operations as much as possible and find out unique ways to ensure that each franchise is maintaining the quality and promise of the brand. When it does this, it will find welcome growth on its doorstep.

Threats in the analysis of Yum brands

Competition from the big two - KFC is the star for YUM Brands but has a major competition from McDonalds which is the majority market share holder where burgers are concerned. Similarly, Pizza Hut is the second biggest brand of YUM but is fast being challenged everywhere by Dominos.

Health conscious mindset - This is affecting the complete fast food industry and YUM brands should not be any different. USA is a country where there is a major obesity problem and hence the general awareness of the affects of fast food have increased. This naturally results in lesser consumption of fast food. Besides US, there are many other countries where fast food is being looked down on. Doctors and health activists actively condone the consumption of fast food. And this naturally will affect the company slowly by surely.

Unorganized competition - Competition not only from KFC or McDonalds but many indirect competitors like Starbucks or other fancy restaurants or even local fast food chains are all competitors for Yum brands. As small businesses grow in frequency, they offer better services to local customers and might offer better localised taste. As a result, this unorganised competition together becomes heavy for the parent brand.